Do I want to be a Landlord, or not?

Recently came across a Large, mixed use, residential, commercial unit and I found myself interested in it. I spent some hours analyzing it.

Sale price $$258K

NOI $57.3K/Yr

Expenses $46.2K Owner was sketchy on vacancy rates. Not verified. He did not include Office, Legal, Prop Maint, Snow Removal.

This owner loved to talk and I felt I had rapport going.

Owner needs cash, in order to be relieved from a 400K debt from a bank.

I thought about JV But I have no landlord exp. I have confidence in the financial side but not on the handyman side. "Fixing everything."

Could not flip due to price.

NOTE: I then got to figuring, could I do this? Do I want to do this? I can fix things, but I am not considered extremely handy, and with this property, I would be having to fix things, ALL THE TIME. Many units.

I find myself still wanting to do this, but I would need someone full time that could fix things like the toilets, the walls, the masonry. What would I pay him?

End result. I find myself wanting to do this, but a partner would be needed. Would a partner even do this with a newbie?

I thought about how to arrange a partnership with the hypothetical figures.

Partner provides the Cash in the tune of $258K. If we split the NOI at 50% each, we both earn $28,650/Yr

I provide the Management by keeping on the current owner at 8% of NOI for $4,584/Yr This $4,584 come out of my pocket. What should his duties be? Rent apts, fix minor things. He definitely won't do major things for $4.6K, so I would need someone to fix major things and pay for it out of my salary of $28.6K

I have stopped my due diligence on this, because it does not appear to be lucrative and I don't want to be stuck in a big multi unit, fixing things, or for that matter living there.

What about capital expenditures? Scenario: If I could live off of the $28.65K per year, AND there were no major property disasters, what time would I have to look for other opportunities? One major problem could require a Contractor at the tune of $70/hr plus material costs.

What method of property mgmnt would work here? Anyone see anything that I cannot see? The way it is now is "Too much work for little.

I am seeing approximately a 11.1% ROI for my partner with these figures. If the property manages to increase in value at 2% per year from its current appraised value of $300K and my JV agreement would be for 5 years, then I would need to save up enough to pay partner his initial investment, plus we would split the appreciated value. Am I way off?

Facts about the subject property

1. Motivated Seller

2. Price too high ( I think this answers my own question.) Owner tries to tell me it is worth a lot more, but it is appraised at $300K

3. Low Income housing. Most tenant's on SSI and SSDI. Rents are well below area standards. There are NO security deposits or last months rents to use for a deposit here.

4. Property is heated at the owner's expense. Owner claims the heat gets turned on in Oct and shut off on March 30th. I don't know about him but I would not be a happy tenant if my apt was 50 degrees on Sept 20th or April 3rd.

5. Owner seems to consider a very and unverified "Vacancy Rate" which I don't think sounds normal for those types of tenant's.

NOTE: I have some cash and a life insurance policy that could have been used for a DP here, but I would not feel comfortable.

NOTE: I have a house now that I want to sell and it cannot qualify for bank financing, which means an Investor. I cannot extract any equity from the home probably because my credit is not great right now. So to use the house as a tool to buy an Income Property is not feasible right now, until it is sold.

My most comfortable idea would be to buy a cheaper home for my primary residence, and use any additional funds to start a "wholesaling real estate business" in my new locale. Somewhere where it is cheaper to live, like Ohio.

There are some big holes in the financials. He has a NOI when divided by the asking price is 22%. That should be a red flag. Of course, you know that doesn't include Maintenance/Cap. reserves and snow removal. I would estimate that at $20,000 to $25,000. I suspect that other things are missing.

Normally, the gross rent ='s the NOI + Expenses. If you used only those listed you would have rent income of about $103K. I would expect the selling price to be 4 - 7 times gross rents. If not all the expenses are there that means the rent is actually higher and the property should be worth more.

Learn a lot more about this property before you buy.

By the way I rent about 20 different buildings at one time. I pay for all maintenance. I don't have to be handy. I do have property management on some of the properties so I don't have to be a landlord if I don't want to.

You're right. I get a sense that the Vacancy Rate was never going to accurate from the owner. Nice enough to talk to. Actually had some rapport with him in our calls. He seemed to insist it is worth much more. Used examples if similar props down the street. Yet it is appraised at 300K. I do realize that what the property generates creates value, but the appraisal also has some bearing.

Below was copied from his documents called Rent Roll, Expenses, and Projected Rent Roll.

I have stopped analyzing this. When asked if he would show his Schedule C, he said something, but I have forgotten.

RENT ROLL FOR SUBJECT PROPERTY

(LOWER LEVEL )

1A VACANT _______________________ $0 (1 BED $450)

2A Tenant 2 _______________________ $450 (1 BED)

3A Tenant ________________________ $690 (2 BED)

4A Tenant ____________________ $500 (1 BED)

6A Tenant _________________________ $500 (2 BED)

( TOP LEVEL FRONT OF BUILDING )

1 Tenant ___________________________ $500 (1 BED)

2 Tenant ____________________ ______ $500 (1 BED)

3 Tenant ____________________________ $575 (1 BED)

4 Tenant ____________________________ $575 (2 BED)

5 TONY CAP (*MAINTENANCE GUY*) _____ $0 (1 BED)

( MID LEVEL )

6 Tenant ____________________________ $750 (3 BED)

7 Tenant ____________________________ $500 (3 BED)

8 (NEW TENANT) _____________________ $550 (2 BED)

9 Tenant ____________________________ $575 (2 BED)

10 Tenant___________________________ $650 (3 BED)

11 Tenant ____________________________$590 (3 BED)

(3 STORE FRONTS )

Commercial Tenant __________________________ $300

BUILDING RENTAL OFFICE ___________________ $420

LARGE STORE FRONT VACANT ( COULD BE $600 TO $800 )

TOTAL RENTAL INCOME _________ $8,625

EXPENSES FOR SUBJECT PROPERTY

ESTIMATED MONTHLY EXPENSES

COMMON ELECTRIC = $200 <- Melarchy for 19 UNITS!

WATER / SEWER = $400 / $350

PROPERTY TAXES = $250 <- WOW this is low

TRASH REMOVAL = $350

OIL FOR HEAT & HOT WATER = $1250 <- WOW. How does he do it?

( HEAT OFF 5 MONTH A YEAR, HEAT CAPS OFF AT 70 DEGREES IN MOST UNITS )

MAINTENANCE / MANAGEMENT = $450

PROPERTY INSURANCE FOR $775,000 = $600

EST TOTAL EXPENSES = $3,850

[ ONCE CONVERTED TO ELECTRIC HEAT WE WILL SAVE OVER $1,000/MOS ( THIS UPGRADE WILL COST ABOUT $30K )

$3,850 - $1,100 = $2,750 TOTAL EXPENSES ]

BELOW IS A SCENARIO HE HAS FOR BOOSTING VALUE OF PROP, but he does not take into account that he will lose quite a few tenant's. From our discussion on the phone, it sounds as if all the tenant's are on SSI or SSDI. If he raised rents by a whopping $100/mo, MANY of these tenant's are going to move. So in reality this will take from 2 to 4 years to work.

Seems like this may not be the first property to start with; mixed use properties are more complicated. It does sound like a fun project though.

If the current owner thinks it is worth so much more, he should be making the changes he suggests before selling it so he can get a higher price. There may be more reasons than being a nice guy as to why he hasn't. I sure wouldn't sell a multi with vacancies; why are they not rented? Are they currently being marketed?

And I completely agree that you don't need to be handy to be a landlord. Landlording has opened our eyes to how much can be outsourced at reasonable costs, and if we watch the experts we can even easily learn to be more handy if we want.

Start outsourcing by having a inspection if you want to move forward. Will the owner share tax returns for the past 3 years? Could help you truth some of the numbers, and judge his integrity. Can you independently verify market rents through Craigslist or other means? How many units have you seen inside?

I assume this is not being run through a realtor? They would get and confirm data. You absolutely must verify all financial info. Start with your county assessor to get tax history -most are now online by address or tax parcel #. Then request utility numbers from the respective utility companies. You can get comps on rents from local property management that will tell you what the market will bear. Again, a commercial agent can give you comps for the commercial space.

As to maintenance, get with your local investment/RE/landlord associations and network to find reputable, cost efficient help.

With no landlord experience you will need to calculate management into your equation. Once you've run everything through your Investment Calculator you can determine what your price is. This is when you will find out how serious your seller is!

As a CPA, I wouldn't ask to see his copies of his tax returns - I'd ask him to have the IRS release their official copies of his own tax return.

One time when we were buying a personal residence in Dallas, the Mortgage Co. AT CLOSING had me complete the IRS Form releasing my prior yr tax returns to them! No problem bc I had honestly conveyed everything to them-also a little late bc I was receiving title at closing, too... I mentioned my displeasure but signed & never heard anything back from them.